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Cisco Systems (NASDAQ:CSCO) has been no laggard to the market's rally this year, participating fully in the climb. The stock is higher by 9.9% year-to-date through March 14, versus the PowerShares QQQ (NASDAQ: QQQ) climb of 5.7%. I have been reevaluating the year's hottest ideas on a stock by stock basis, because at this point, stock picking should start to get more discriminating. After working through my process, I have found that there is still a lot to love about Cisco.

I just recommended investors hedge against the risk I see with Cisco's peer Alcatel-Lucent (NYSE:ALU), a stock where some investors have been betting on a turnaround; though I think it's still too soon. In Alcatel's case, the current quarter consensus estimate is deteriorating, and I suspect there's a good chance the company could disappoint on the quarter considering its operating environment (big stake in Europe), the uncertain current state of affairs and its recent history. When the competition is weak, market share is vulnerable, and so Cisco may benefit from the disruption at Alcatel-Lucent.

The earnings outlook is precisely where Cisco and Alcatel differ, and Cisco's outlook is one of the important reasons why I like the stock here. In ALU's case, one analyst cut his current quarter number over the last 30 days and there were no estimate increases, but in CSCO's case 14 analysts have raised estimates and none have reduced them. ALU's EPS estimate for the current quarter has fallen to a loss of $0.11, versus a loss of $0.08 90 days ago. CSCO's EPS estimate for the quarter has been increased, though the consensus number has remained at $0.49. Estimates for ALU's full-year 2013 have been reduced to -$0.13 from -$0.07 90 days ago, while estimates on CSCO's fiscal year 2013 (ending in July) have been raised to $1.99 from $1.96 90 days ago. In ALU's case, there's a recent history of earnings disappointments. Cisco's EPS estimates have improved because the company beats estimates quarter after quarter, and by $0.03 last quarter or 6%.

That's the kind of a trend I like to see. In terms of valuation, CSCO is not priced excessively high either. It does not trade at a historical high P/E ratio or carry a PEG ratio above 2.0 like Johnson & Johnson (NYSE:JNJ), which is a recent high flyer as well, but a name I just suggested selling. CSCO has a P/E of 12.4X its trailing 12 months of EPS. That's a level at just 78% of its five-year average P/E of 15.9X, so if the stock could get there on P/E expansion, it would be 28% higher and trading at $27.68 instead of $21.59. The P/E is expanding now, along with stocks generally; it was 12.1 a month ago. The five-year average low for the P/E is 12.8X. That is higher than its current P/E ratio and sure seems to offer a margin of safety; and that's for a stock of a cyclical company with growing earnings and that is operating in an improving economy.

Analysts see Cisco's EPS growing 7.6% this fiscal year ending in July and 6.8% over the next two fiscal years, which seems to illustrate a conservative EPS estimate for FY 2014. The modest expectation is further evidenced by the analysts' consensus forecast for 8.4% EPS growth over the next five years. Because of the fiscal year end in July, I have taken the liberty to average the two earnings estimates to get my version of an estimate for the forward 12 months. That figure is $2.05, and the stock trades at 10.5X that and compares well to the 18.1X P/E ratio of the S&P 500 Index.

If we apply the 8.4% five-year growth rate to the 10.5X P/E, we get a PEG ratio of 1.25X, and that is not expensive considering the EPS trends, especially considering the estimate is likely understated. Cisco has beaten earnings estimates over the last four quarters by a penny, a penny, two cents and three cents. Assuming it can beat by a penny in each of the next four quarters, we get an EPS estimate of $2.09 instead of $2.05, giving us a P/E ratio of 10.3X and a PEG ratio of 1.22X, and that is still conservative. Cisco has a growing and likely strengthening U.S. economy going for it, a weakened competitor in Alcatel-Lucent , and is priced modestly at a historically low valuation. Capital inflows will continue into equities, but as discriminating capital shifts out of more expensive high flyers like Johnson & Johnson, it will seek value in cyclical names like Cisco.

Source: Cisco Systems, A Strong Buy For Multiple Reasons